14 Types Of Alternative Financing For Small Businesses
Small business financing is notoriously difficult to procure. Most bank loans require that the applicant have stellar credit and 2+ years in business—and even then, there’s no guarantee you’ll get a loan. According to Biz2Credit, big banks approved fewer than 27% of all small business loan requests in November 2018, while smaller banks approved about half of SMB loan applications received.
Increasingly, small businesses are turning to alternative financing options, and the internet has made it easier to get business funding from other channels. With most of the options presented below, you can apply online and get funding much more quickly and easily than you would with a bank loan.
Read on to learn everything you need to know about the world of alternative small business financing. We’ll also give you some recommendations about reputable alternative lenders.
Table of Contents
- 1. Lines of Credit
- 2. Online Loans
- 3. Term Loans
- 4. Short-Term Loans
- 5. Merchant Cash Advances
- 6. Personal Loans
- 7. Business Credit Cards
- 8. Microloans
- 9. Crowdfunding
- 10. SBA Loans
- 11. Invoice Factoring
- 12. Invoice Financing
- 13. Equipment Financing
- 14. Business Grants
- Final Thoughts
1. Lines of Credit
A line of credit (LOC) is another product you can get from either a bank or an online lender—but as with term loans, business LOC’s are typically easier to get online than from a bank. In case you’re not familiar with the term, a line of credit can act as a financial safety net or source of working capital for a business; in effect, you are granted a sum of money from which you can draw at any time (much like a credit card). You are charged interest only on what you borrow.
An online business line of credit is a good alternative financing choice for a business that doesn’t require a specific amount of money but wants access to extra funding to cover expenses such as payroll during skinny times.
Our Pick: OnDeck
OnDeck LOCs are easy to qualify for and even easier to use. Eligible business owners can use OnDeck’s “Instant Funding” option, which lets you transfer up to $10,000 from your LOC to an eligible debit card within seconds or minutes; this means you don’t have to wait the usual 1-2 business days for a standard bank transfer.
2. Online Loans
Online lenders sell business financing products similar to those offered by banks, such as term loans and lines of credit. However, online loans differ from bank loans in a few important ways. Generally, online loans come with less stringent requirements regarding your credit score, time in business, and annual revenue. They are also easier to apply for and take less time to be funded. The only caveat is that in exchange for this convenience and accessibility, online loans usually carry higher interest rates and fees than bank loans do.
Online lenders who offer short-term loans (STLs), in particular, have especially lax requirements—and especially high interest rates. (More on STLs in a bit).
Our Pick: Lendio
Lendio is a loan marketplace you can use to find term loans and other business financing products online. With the help of this free service, you can evaluate and prequalify for offers from multiple business lenders with one application.
3. Term Loans
A term loan, also called an “installment loan,” is a traditional form of business financing, historically obtained from a bank or credit union. The “term loan” designation simply means that the loan is repaid over a set term (for example, 6 months or 5 years), with a fixed or variable interest rate. In fact, this describes the structure of most traditional business loans. However, there is a whole new breed of term loans online.
These days, you can apply for a term loan directly from an online lender’s website, using a loan marketplace, or even via a crowdfunding platform (more on crowdfunding later).
Modern SMB term loans are often more user-friendly and customizable compared to the term loans of yore. While they maintain the same basic borrowing and fee structure as a traditional term loan, today’s online term loans have built-in flexibility and transparency, allowing you to receive funds and send payments electronically with as little hassle or confusion as possible. As mentioned, online term loans can also be easy to qualify for, even if you have bad credit.
Our Pick: Fundation
Fundation is a quality online term-loan lender that offers rates and fees almost as good as you could get from a bank, but with less hassle and a faster time-to-funding. Note that you need good credit to qualify.
4. Short-Term Loans
Short-term loans are alternative business financing products that you apply for online rather than from a traditional bank or credit union. An STL is a type of online term loan, but in addition to having a shorter repayment term—almost always within a year, or sometimes just a few months—short-term loans differ from traditional term loans in several important ways:
- Factor rate fee structure instead of interest rate
- Lender cares more about your daily cash flow than your credit score
- Faster time to funding (1-2 days)
- Higher total loan cost (typically between 10% and 60% of the borrowing amount)
- More frequent repayments (often daily)
While there are some fair short-term lenders out there, beware that the short-term loans market is also rife with predatory lenders that charge exorbitant fees. With that said, if you can find a reputable short-term lender, you can potentially obtain a large sum of cash to fund your small business within a very short timeframe.
Our Pick: LoanBuilder
LoanBuilder (a PayPal service) lets you build the perfect short-term loan and potentially get your funds as soon as the next business day after submitting all of the needed documents. We appreciate their speed, transparency, and especially their loan configurator, which allows you to see exactly what you’re getting into and even adjust the terms to your liking.
5. Merchant Cash Advances
Merchant cash advances resemble short-term loans in that they are relatively easy to get, have a factor-rate fee structure, and can be a lot more expensive than a regular bank loan. Technically, though, a merchant cash advance is not a loan—it is an advance on your future earnings. A lender fronts you a set sum of money and then starts recouping the advance (plus interest) as a percentage of your daily sales. This means that the amount you pay daily will fluctuate with your sales. There is generally no set deadline to repay an MCA; the MCA company will just keep taking a cut from your daily sales until they are repaid.
Generally, I would not recommend getting an MCA unless you can’t qualify for any other loan product, as these are even more expensive and potentially predatory than STLs. But on the other hand, MCAs are one of the few sources of financing available to brand-new, bad-credit, or otherwise struggling businesses that are excluded from the traditional lending market.
If you do decide an MCA is your best option, make sure the company giving you the advance does not practice double-dipping (charging you interest on interest) and use a merchant cash advance calculator to determine your approximate daily payment and approximate number of days to repay.
Our Pick: Shopify Capital
While it’s only available to businesses that use Shopify eCommerce or Shopify POS, we like Shopify Capital’s MCAs for their simplicity and competitive rates and fees. Square and PayPal also offer similar financing products for businesses that use those payment systems, though those ones are technically STLs and not MCAs.
6. Personal Loans
If you haven’t been in business very long and don’t have much in the way of business revenue yet, it can be very difficult to get a traditional business loan. Fortunately, many personal loans can also be used for business purposes. With these loans, typically structured as regular installment loans, your eligibility and interest rate are determined by your personal creditworthiness and household income.
With this type of financing, you can expect to have access to a smaller amount of money. Most personal lenders cap their borrowing amounts at $35K or $50K. If you need much more capital than this, a personal loan isn’t for you.
Our Pick: Lending Club Personal Loans
Lending Club is one of the oldest and most established online lending companies offering personal loans for business. If you have at least fair personal credit and a low debt-to-income ratio, you may qualify for a loan of up to $40K that can be used for business purposes.
7. Business Credit Cards
Business credit cards can be a useful way to pay for business expenses without having to get a loan. You can use them to pay for large or small-ticket items, all while earning rewards and building your business credit profile. Even if you don’t necessarily need to make a big purchase right now, it’s a smart idea to have a business credit card on deck for when you do need it.
When choosing a business credit card, make sure you pick one that gives you the highest amount of cash-back (or miles or other rewards) for the types of purchases your business makes most. For example, some cards are ideal for charging business travel expenses while others reward common business office expenses such as utilities and office supply purchases. Some cards also offer a 0% introductory APR for the first year.
The best business credit cards generally require you to have good or excellent credit.
Our Pick: Chase Ink Business Cash
This is one of the best business credit cards right now for cash-back, offering 5% cash-back for eligible business purchases with a maximum earning amount of $25K per year. Chase currently offers a high signup bonus of $500 if you spend $3K in the first 3 months of opening the account, as well as a 0% introductory APR and no annual fee.
Chase Ink Business Cash
15.49% - 21.49%, Variable
Microloans are small loans of less than $35K (typically closer to $5K–$10K), offered at a low interest rate. Typically, microloans are given to startups or newer businesses in need of working capital. They often serve under-represented or disadvantaged groups (such as woman-owned businesses, veteran-owned businesses, and minority-owned businesses) even including those with bad credit.
Banks historically have not been interested in lending such small amounts of money, but alternative lenders, including for-profit and not-for-profit lenders, have entered the microloan space in recent years.
Our Pick: Accion
Accion is a nonprofit online lender that provides fairly priced microloans to small business owners, including those with bad credit. Their loans and requirements vary by geographical area; make sure the Accion loan you’re considering is available in your region.
Crowdfunding is a smart way for some types of businesses to raise funds from their peers online. There are four types of crowdfunding: debt, rewards, equity, and charity. With rewards crowdfunding, you don’t have to pay the money back; instead, you agree to give your backers something in return for their donation. With equity-based crowdfunding, someone invests in your business in exchange for a share of your business/product. You may also have to pay a fee to the crowdfunding platform itself. This article goes into more depth about the different types of crowdfunding.
Crowdfunding is only appropriate for some types of businesses. Popular crowdfunding sites Kickstarter and Indiegogo are geared toward individuals who are creating some sort of media (like a movie or music album) or an innovative, consumer product (such as a new tech gadget). Several others, including GoFundMe, are more geared toward charitable projects (though it is technically possible to use GoFundMe for a business). Still, there are some sites like Fundable, which offer crowdfunding to a wide range of business types.
Our Pick: Kiva
Kiva is a nonprofit business financing platform that allows SMBs to crowd-fund 0%-interest microloans of up to $10K. If you have no/bad credit or your business is still in the idea stage, Kiva can be a useful platform to crowdsource a modest-sized, interest-free loan.
10. SBA Loans
US government-backed Small Business Administration (SBA) loans are an excellent alternative to standard bank loans, especially if you don’t have very much collateral. The SBA does not originate loans; instead, it guarantees a portion of a loan issued by a bank, credit union, nonprofit, or other lender. The guarantee means that, if you default on the loan, the SBA will repay a portion of the remaining debt. As a result, the bank can offer you lower interest rates than they normally would without the SBA’s backing.
The SBA offers a few different loan programs, but the most popular is the general 7(a) small business loan. It may take up to several months to receive SBA loan funds after approval, but there are online lenders that use technology to speed up and simplify the process of applying for an SBA loan, with the result that you might get your loan several weeks faster.
Our Pick: SmartBiz
SmartBiz is a reputable online lender that streamlines the SBA loan application process, making it easier than ever to get an SBA loan. If you meet the (somewhat strict) qualifications, you can potentially get an SBA loan through SmartBiz with excellent terms and fees, and a time-to-funding of just a few weeks.
11. Invoice Factoring
Invoice factoring is a type of financing that frees up cash from outstanding invoices. Here’s how it works: The invoice factoring company or “factor” will purchase your unpaid invoice and front you typically 85–95% the value of the invoice. The factor then collects payment from your customer and sends you the remaining amount of the invoice, minus a 1–5% factoring fee. Your factoring fee is determined, in part, by how long it takes your customer to pay.
As you might expect, invoice factoring is appropriate for businesses that frequently have unpaid invoices and have cash flow problems as a result. You might pay a sizable factoring fee, but it can be worth it if you need cash right away, especially if you don’t enjoy trying to track down and collect from delinquent customers. Bad credit isn’t typically a concern, as factors are more concerned with your customer’s ability to pay, not your business’s. As such, startups and newer businesses are both eligible for this alternative financing option.
Our Pick: BlueVine
BlueVine is an easy-to-use invoice financing service for small businesses. BlueVine’s terms are refreshingly fair and transparent, with no hidden fees or long-term contracts. BlueVine also lets you choose which invoices you want to sell and whether you want customers to be notified of this sale.
12. Invoice Financing
The two terms sound alike, but invoice financing is not the same thing as invoice factoring. With invoice financing, the financing company grants you a line of credit, using your unpaid invoices as collateral. The size of the line of credit depends on the amount of your unpaid invoices. The financing company does not actually purchase the invoices, so it is still your responsibility to collect from your customers (remember that with invoice factoring, you sell your invoices for immediate cash and it becomes the factoring company’s job to collect payments on those invoices).
Invoice financing is a smart solution for businesses with unpaid invoices that don’t necessarily need immediate cash or have a problem with a third-party collecting from their customers. Invoice financing also typically has lower fees than invoice factoring.
Our Pick: Fundbox
Fundbox’s fees can be a little steep, but their ease of use and low borrower requirements make their services useful for many B2B and B2C businesses — and even some freelancers. Note that you will have to make weekly repayments on your invoice-backed Fundbox LOC, regardless of if/when your customer pays.
13. Equipment Financing
Equipment financing is, well, exactly what it sounds like. That is, it’s money you borrow to get the equipment you need to run your business, whether you need a new computer system or industry-specific machinery.
The term “equipment financing” encompasses both loans and leases. Equipment loans are best for companies that can afford a down payment on equipment with long-term utility. Leases are more appropriate if you can’t afford a down payment or if the equipment needs to be replaced or upgraded frequently. If you’re not sure which is right for your needs, check out our article on equipment loans vs. leases.
Our Pick: Currency Capital
Currency Capital is an alternative financing company that connects customers with third-party equipment loans and leases, and also provides payment services through its CurrencyPay product. Currency has relaxed borrower qualifications and a positive public reputation.
14. Business Grants
Ah, the elusive business grant, a.k.a., FREE MONEY. This is probably the most difficult type of business financing to get, but if you think you might be eligible, you should definitely look into your grant options. Many business grants are government-funded (on a federal, state, or local level), though some NGOs and even privately held businesses also offer small business grants.
SMB lender StreetShares awards grants of up to $15,000 to veteran small business owners, and there are also several business grants for women. Innovative tech startups might be eligible to receive up to $1.5 million in grant money from the federally funded Small Business Innovation Research (SBIR) program.
A few more things to note about alternative financing for your small business:
- If you do want to try to apply for a bank loan rather than an online loan, consider going through the SBA and/or applying to a small bank or a credit union where you will have a higher chance of being accepted.
- A merchant cash advance should only be used as a last resort—the fees and terms are generally not very merchant-friendly.
- The better your credit score is, the better lending options you’ll have. It is wise to make efforts to improve your credit score before you start applying for loans.
- The vendors I’ve recommended for each category may not work for you, depending on your needs and qualifications. To compare alternative business financing options, please check out our top lenders in the categories of online loans, lines of credit, business credit cards, and so on.
To evaluate multiple lenders at once, it’s a good idea to use a free loan matchmaking service, often called a “loan aggregator.” Lendio is one such loan aggregator service we recommend, as it lets you evaluate multiple financing options with a single application.
Need more help choosing an alternative lending option? Leave a question in the comments and I’ll do my best to answer it!